Chip equipment firms set sights on '03

Industry's largest trade show yields concern, caution

ChrisKraeuter

SAN FRANCISCO (CBS.MW) -- Semiconductor equipment stocks were pummeled lower at the end of the week on concerns of slack demand from a major customer but stocks still might not be ripe to rise.

Last week at the largest semiconductor equipment trade show, top executives seemed resigned to a flat second-half of the year as a technology spending malaise shows no signs of improvement.

Further, the stock market's brutal slide has some concerned about access to new sources of money for those further down the food chain.

"We are perilously close to having a liquidity crisis which would dramatically affect the equipment industry," said CEO Rick Hill of Novellus Systems
NVLS
which makes equipment that deposit materials on silicon.

His main concerns revolve around his customers, the chipmakers, and his customers' customers, manufacturers that make products like stereos or cell phones or computers. He said many are not as well positioned with cash as his own firm, which has $1.8 billion.

While this does not diminish his belief in the long-term growth of his industry, he said that, "We are in a very tenuous situation."

Hill spoke during the Semicon trade show in San Francisco on Monday. Later that day, he delivered his company's quarterly financial report and issued third-quarter targets that were below analyst expectations. See full story about Novellus' report.

FEI
FEIC
Chief Executive Vahe Sarkissian, who recently announced a merger with competitor Veeco
VECO, +3.12%
said he, too, is concerned about his customers' access to capital.

"End demand and the creation of new demand always requires capital," he said. "There seems to be developing economic strength and on the other hand there's a significant concern about applying capital in the right places."

Based on a tracking index created by Semicon's sponsor, the trade group Semiconductor Equipment and Materials International, domestic equipment and materials stocks have declined 30 percent during the past 12 months and 20 percent during 2002.

This past week, the index lost 15 percent, mainly due to Taiwan Semiconductor cutting its capital expenditure plans from $2.5 billion to less than $2 billion. The foundry is the second biggest spender in the industry.

Even an industry-wide upgrade from Goldman Sachs analyst James Covello was not enough to rally the group. "We are not highlighting that stock prices can't go any lower, and we are not saying that fundamentals are improving as we have little visibility as to when fundamentals will once again become more favorable," he wrote on Friday morning. "Rather, we believe that for short periods of time, factors such as funds flow and seasonality can be important drivers of the stocks." See full story.

Some equipment companies still may have further to fall. The end-of-week sell-off pushed Novellus beneath its post-Sept.11 induced low. Applied Materials
AMAT, +1.87%
ASML
ASML, +1.23%
Asyst
ASYT
and MKS
MKSI, +1.75%
have yet to breach those levels while KLA-Tencor
KLAC, +1.21%
and Cymer
CYMI
are not even close to approaching their lows.

"While a near-term rally is very possible, an upgrade is not warranted for us as stocks exhibit neither 'washed out' valuations, nor 'slam dunk' (or even achievable) near and medium term expectations, and we want to conserve our bullets," said analyst Tim Arcuri of Deutsche Bank on Friday .

He said recently that Wall Street estimates are still too high for the group and that negative talk about another wave of expected cost cuts should keep stocks under pressure in the near term.

Last week, a SEMI survey revealed equipment executives now expect sales to decline 19 percent this year instead of the 3 percent decline they expected back in December.

Analyst Chris Chaney with A.G. Edwards said downsides to current prices are limited, but that he recommends only long-term investors get into the sector.

"Our belief is that semiconductor makers are likely to curtail capital equipment spending until a consistent upturn is evident in the general economy," said Chaney. "Although there have been signs of general bottoming in the economy, the economy still lacks a catalyst for growth, which we believe will hold back capital spending for the remainder of the year."

Photronics CEO Dan Del Rosario said the market is under a tremendous amount of pressure, in addition to extenuating circumstances such as several cases of accounting fraud that have been causing stocks to fall.

Last week, Photronics
PLAB, -0.20%
warned investors that results for its quarter ending in July will be worse than expected. His company makes photomasks, which are used to make chips the same way that negatives are used to make photographs.

Speaking this week at Semicon, Del Rosario said, "We need to perform in the short-term, but there are some things we can't control."

Despite the hazy near-term outlook for many of these companies, executives were quick to point out how semiconductors, and in turn the equipment needed to make them, are constantly becoming more prevalent in every day life and that that trend will not change.

Jim Morgan, CEO of Applied Materials, the world's largest equipment company, would not comment about current conditions surrounding his own company because its quarter ends next week. However, he repeated previous comments concerning his expectations for a two phase recovery, the first of which he said is under way.

"We've had some significant downturns in the past and, still, there were opportunities ahead," he said.

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